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On Friday 2nd November 2012 at 0830 ET/ 1230 GMT, the US Bureau of Labor Statistics will publish October payrolls data. The market expects a 125k increase in Non-Farm payrolls, up from the 114k recorded for September. Private sector payrolls are expected to rise by 124k, while the unemployment rate is expected to edge up to 7.9% from 7.8% in September.

Please note that due to operational issues in our New York office following the recent storm we will not be providing’s proprietary model’s forecast for payrolls this month.

Looking at various labour market indicators we expect the US economy to generate between 120k-130k jobs – around consensus- and for the unemployment rate to remain at 7.8% or edge up slightly to 7.9%. The unemployment rate could edge up as some people return to looking for work after September saw a surge in the number of people leaving the workforce altogether. We believe the September data was an anomaly and more people returned to the workforce in October, which may cause the unemployment rate to nudge higher.

The labour market indicators for October have been fairly mixed:

1, The ADP employment report (which was measured using a new methodology for October) was stronger than expectations rising to 158k, up from a negatively revised 114k in September. The new survey is expected to have a closer relationship to the BLS data. However, it is early days and we do not know how close the ADP data will reflect the BLS data for last month. Due to the historically low correlation between the two data sets we don’t have confidence that the ADP report will point to stronger gains in the BLS data this month.

2, Initial jobless claims: the 4-week moving average has been practically flat for the last three weeks around 365k. This suggests a fairly neutral reading around 125k for NFP.

3, The employment component of the ISM manufacturing survey also has a fairly close relationship with payrolls data. This fell to 52.1 in October from 54.7 in September. This is above the crucial 50-mark, which confirms expansion, however only at a very low level. The employment reading was one of the lowest in the past 12 months and was below the average of 54.3 for the past year.

4, The Philly Fed, which also has a close relationship with initial jobless claims and also payrolls, saw a decline in its employment index for October to -10.7 from -7.3 in September. This was the lowest reading of the employment component since late 2009.

Overall, the labour market indicators suggest that NFP growth was just above 100k, which is fairly lacklustre jobs growth. However, the declines in the Philly Fed survey employment component and the ISM manufacturing employment sub-index for October is a keen reminder that the US economy is not out of the woods yet and the employment situation remains fragile. This supports QE3 from the Fed.

How Sandy may have impacted payrolls:

We know that initial jobless claims data for last week had to be estimated for New Jersey and Washington DC, which leaves this month’s payrolls data less transparent than normal and at risk from potential revisions further down the line. However, we think the impact of Sandy on the October report was fairly minimal. The November report could be more dramatically affected if power and transport services along with the clean-up operation keep people away from work and businesses closed for a prolonged period.

The election:

Although Sandy has stolen the headlines it is worth remembering that this payrolls report comes just before next Tuesday’s Presidential election. This is viewed as a pivotal survey as another fall in the unemployment rate may be a boost to President Obama and the Democrats. Since the Democrats are commonly deemed less business- friendly than the Republicans a positive NFP reading and another drop in the unemployment rate may cause risky assets to fall.

We think the timing of this report – hot on the heels of the storm that battered the East Coast and just ahead of the election – could make this data particularly difficult for the market to read and we envisage Friday at 1230GMT/ 0830 ET to be volatile across asset classes.

Chart 1: US ISM employment report and NFP - the ISM employment component suggests fairly lacklustre jobs growth this month.

Source: Bloomberg and

Chart 2: Philly Fed employment component and NFP – the Philly Fed employment index has a close correlation with payrolls and has been particularly weak recently

Source: Bloomberg and

Potential market reaction:

Here are a few potential scenarios that could play out post the payrolls report on Friday:

1, A number above 160/170k may cause risky assets like the euro and stocks to rise. We could see EURUSD rise above 1.3025 (current resistance) which would leave the door open for a rise to 1.3175 – the September highs.

2, A very large positive surprise (say 200k +) could weigh on risky assets and boost the dollar as it would support the Fed cutting QE3 short. This would be positive for USDJPY and we may see this pair test 80.90 resistance.

3, A reading sub 100k would most likely cause a knee jerk reaction lower across asset markets and a flight to safe havens like the dollar and the yen. This could cap gains in USDJPY. However, once the dust has settled this may cause the dollar to fall and risky assets to continue their march higher, as the prospect of a prolonged period of QE3 increases.

4, A reading roughly in-line with consensus between 120-135k may cause only temporary volatility before the market settles back into its recent range. For EURUSD this has been 1.2880 – 1.3025.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957  | e:| w:

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